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Is the ARC Loan a Sinking Ship? Pending legislation could spell doom for the SBA's latest loan program.

By Mark Deo

Opinions expressed by Entrepreneur contributors are their own.

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It's been six months since the SBA announced the America's Recovery Capital Loan program. My last article on this topic, "Will Anyone Be Saved by the ARC" discussed banks' hesitance to participate due to the onerous requirements and lending limitations for such a small loan amount.

The ARC loan is a $35,000, interest-free, 12-month deferred-payment loan that is fully guaranteed by the SBA. The goal of the program was to allocate $256 million in temporary relief to approximately 10,000 established, viable, for-profit small businesses suffering "immediate financial hardship."

After much wrangling from both the SBA and participating banks, approximately 45 percent ($142.1 million) of the total funds allocated to the ARC loan program has been delivered to 4,392 U.S. businesses. The SBA has been authorized to make ARC loans available through Sept 30, 2010. However, Jonathan Swain, SBA assistant administrator in Washington, D.C., says the funds will be exhausted well before that date.

"Considering the purpose of the ARC loan," Swain says, "it seems to have been administrated very efficiently. This loan is fundamentally different from any other SBA-guaranteed loan offered to date." He added that designing the ARC program to assist businesses already behind on their debt repayment is a stark contrast to the way most financial institutions qualify borrowers based on their ability to repay loans in a timely way. "We have currently had [more than] 1,000 lenders who have made ARC loans. And considering the temporary nature of the loan and the fact that lenders are now required to set up a whole new system to service a less credit-worthy type of borrower, we believe it has been an effective program."

Not everyone agrees with the SBA's assessment of the program. "We do not believe that the ARC loan program is very efficient," says Tom Burke, senior vice president for Wells Fargo Bank. "In fact, considering the loan amount, it is quite a tedious process both for the lender and the borrower. For example, all of the typical SBA guidelines apply to this loan, plus another 40 pages of additional stipulations that make customers unnecessarily jump through hoops." Burke also pointed out that most ARC loan applicants are micro-businesses that typically lack the required documentation larger businesses have, such as CPA relationships, audited financials, proper tax records, etc. And while a more streamlined process and expanded lending limits would be ideal, Burke says making the ARC program available is important in supporting the bank's customers.

Despite the barriers, the question remains: What will come of the program? Ironically, Sen. Olympia Snowe (R-Maine), one of the ARC loan's original authors, introduced a bill on Nov. 16 to repeal the program.

"Too many borrowers are defaulting on the government-backed loans intended to buoy struggling businesses," Snowe says, contending that default ARC rates will be higher than expected.

But according to the SBA, a 56 percent default rate was built into the program to ensure proper funding for loan guarantees.

"It is ludicrous to even suggest that there is an unreasonable default rate to this program. Funds have not even been fully disbursed and there is a 12-month deferred repayment, so there is no viable data available to determine default rates," says small business advocate Chuck Blakeman. He added that the lending guidelines are so onerous that only healthy businesses with the highest credit ratings could qualify. "The House recently passed a bill that would extend the ARC loan program with a few tweaks such as increasing loan limits and making the application process easier. It seems unlikely, however, that the bill will pass in the Senate."

Regardless of the problems plaguing the ARC program or its ultimate fate, there are still funds available at this time. It is extremely important potential borrowers do the preparatory work to ensure they have met all of the documentation and financial requirements. For more information about the program, visit

Mark Deo

Mark Deo is author of The Rules of Attraction: Fourteen Practical Rules to Help Get The Right Kind of Clients, Talent and Resources to Come to You. A leading advocate of small business, he has appeared on CBS, FOX Business, NPR and MSNBC and his articles have been published by Business Week, Entrepreneur, Fortune and CNN/Money. He is CEO of the SBA Network, Inc., a small business growth-management firm in Los Angeles, Calif.

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